Dividend Reinvestment Helps Investor And Company

February 23, 1987|By Knight-Ridder Newspapers.

About 1,000 U.S. companies offer their shareholders a choice at dividend time: They can take the cash or they can use it to automatically purchase more of the stock, often at a discount and usually without any broker`s commission. Such dividend reinvestment plans can be advantageous for investors and the companies that offer them.

At the very least, the company usually wins points with the shareholders, who often find the plans attractive, and it also can be a way of giving the company cash or increasing its capital.

Less happily, dividend reinvestment can result in a ``nightmare of accounting`` for shareholders, said Alvin F. Kaufman, partner in charge of the tax department of Arthur Andersen & Co. in Philadelphia.

The problem arises because shareholders must report to the Internal Revenue Service the purchase price, or ``cost-basis,`` of the stock when it is sold, so the capital gain or loss can be figured. Because dividend reinvestment plans often involve fractions of a share, some tedious figuring often is required to produce a cost basis for a single share.

Still, that`s a relatively minor inconvenience in most cases, outweighed by the savings aspect of the plans. The reinvestment is often most attractive to small investors whose dividend checks would not be large anyway and who would welcome a chance to see their investment in a company grow.

Dividend reinvestment is most popular with banks and utilities, said Sumie Kinoshita, who compiles a directory of companies offering the plans.

Kinoshita says that the number of reinvestment plans has held relatively steady around 1,000 since she began tracking them in 1981.

Of that number, she said, about 175 offer shareholders a discount

--usually 3 or 5 percent--off the market value of the stock at the time the dividend is being used to buy the stock.

About 70 percent of the companies offering dividend reinvestment charge no fee on the transaction, she said, and those that do typically charge only $2 or $3, much less than a stockbroker would charge.

And most of the companies allow shareholders to use their own cash to purchase additional shares through the plan.

What has become very rare, though, is a plan that allows shareholders to use their own cash to buy additional shares at a discount--most charge the full market price, though there is no commission or only a small charge.

Kinoshita`s directory details the reinvestment plans and the addresses of the companies. It is available for $19.95 from Evergreen Enterprises, P.O. Box 763, Laurel, Md. 20707.

Aside from whatever bookkeeping problems such plans create, she said, the other complaint shareholders are likely to have is that in some cases, companies have been slow in sending certificates for the purchased stock when a shareholder ends his or her participation (companies usually don`t issue certificates at the time of purchase).

If you use your dividends to buy stock, however, you still have to pay income taxes as if you had received cash. Kaufman of Arthur Andersen notes that if you get a discount on the stock, you will be taxed as if you had received enough cash to pay full market price for it.

Then comes the problem of figuring the cost basis for the stock.

``Most dividend reinvestment plans give you a statement with the history of the shares. Hang onto those,`` Kaufman said.

If you decide to sell some of the shares that have accumulated through a lengthy participation in a plan, you face a choice, he said.

If you do not specify what shares you are selling, the assumption will be ``first-in, first-out,`` the shares you bought first will be the shares you sell first, Kaufman said.

But you can specify others if you choose, he said, selecting those with the highest cost basis if you can show a capital loss on the sale, for instance.

Reinvestment plans frequently result in a shareholder getting, say, a quarter of a share in each dividend period, and those transactions can result in ``a nightmare of accounting`` when it`s time to figure the cost basis, Kaufman said.

But the problem ``goes away if you sell the whole block at one time,`` he said, because then the cost bases for all the stock are added togther and divided by the number of shares.